MODARABAS: DRAWING STRENGTH FROM DIVERSITY
They have the capacity to bring the change as an appropriate infrastructure is in place with more than twenty years of experience
By SHABBIR H. KAZMI
Aug 09 - 15, 2004
Investors seeking Riba-free income are interested in earning modest return as well as exposing themselves to quantifiable risk. There are few opportunities available in the prevailing financial system for earning modest return on investment and even fewer options offering Riba-free income. Modarabas offer both the opportunities to earn modest return on investment as well as the Riba-free income. At present Modarabas constitute the largest sub-sector of Pakistanís financial market in terms of number of entities. The single largest contribution of Modarabas is that they have been playing a dynamic role in the process of Islamization of financial system in the country. They also have the capacity to bring the change due an elaborate infrastructure is in place and more than twenty years of experience.
With the initiation of process of Islamization in mid eighties, Pakistan saw the dawn of Modarabas. The first ever Modaraba was listed in 1985 and the decade of nineties witnessed the largest number of listing. Many financial institutions and industrial groups have floated Modarabas. Amongst the early entrants were ANZ Grindlays Bank (now merged with Standard Chartered Bank), Habib Bank, Habib Bank AG Zurich, Bank of Punjab, Allied Bank of Pakistan and some established local business houses. The close liaison with the regulators has helped in improving working environment and capacity building of the players. The recent mergers and acquisitions indicate the general shift towards consolidation, much needed to usher in greater financial stability and operational flexibility.
According to the data available with Modaraba Association of Pakistan (MAP), about its members, the number of management companies has come down from 39 companies in 1998 to 30 companies in 2003. During this period paid-up capital went up from Rs 6,799 million to Rs 7,633 million. Yet another indicator of the growing strength of Modarabas is the growth in profit after tax. The cumulative profit of 38 members of MAP was as low as Rs 25 million for the year 1999, which touched Rs 1,072 million level for the year 2003.
Modarabas are capable of undertaking any business activity that is in conformity with Shariah. Modarabas operating in Pakistan can be divided into two distinct categories ó1) multipurpose and perpetual and 2) specific purpose. Modarabas are engaged in a variety of activities that include manufacturing, leasing, trading of commodities, portfolio management and equities trading, providing venture capital and the scope of their activities is widening with each passing day. Some of them deserve specific mentioning.
Al-Zamin Leasing Modaraba (AZLM) commenced its operations in August 1992 with a paid-up capital of Rs 100 million. While leasing is the core business of AZLM other admissible modes include finance leveraged trading through Musharika and Morabaha transaction, capital market operations, trading in Islamic financial instruments and providing venture capital. As part of its growth strategy, the AZLM acquired majority share holding and management control of Ghandhara Leasing Company in 2001, which was subsequently merged with AZLM. Merger of First Professional Modaraba with the AZLM was completed in 2003. The AZLM attained total equity of Rs 318 million and total asset base of about Rs 1,200 million as on June 30, 2003. The AZLM also has the distinction of being the first company from the financial sector to issue Musharika-based Term Finance Certificates (TFCs). The first tranche of Rs 250 million was oversubscribed and exercising greenshoe option retained the full amount. Yet another achievement of AZLM is its inclusion in leasing to Micro and Small Enterprises Programme of the Swiss Agency for Development and Cooperation (SDC). This programme in Pakistan is aimed at helping micro and small enterprises in improving their income and employment potential.
First Equities Modaraba (FEM) is a multipurpose and perpetual closed-end fund. It diversified its operations in 2002 by buying membership cards of all the three stock exchanges operating in the country and two rooms at Karachi Stock Exchange for a total investment of Rs 32.5 million. Based on the financial results for the year ended June 30, 2004, it has declared 42.5% dividend and also announced to enhance capital through issue of 100% Right Shares at a premium of Rs 5/share. The certificates of FEM are actively traded and price went up to as high as Rs 34/certificate on July 29, 2004, the day financial results were announced.
Fayzan Manufacturing Modaraba was incorporated in pursuant to a joint venture agreement between Faysal Bank, Al Faysal Investment Bank, Meezan Bank and Pak Kuwait Investment Company. This is a specific purpose Modaraba floated for a period of five and half years, commencing March 22, 2001. It has been floated to construct, operate, manage and own a polyester staple fibre spinning and processing plant at the premises of ICI Pakistan under the licence agreement with ICI. The plant has commenced commercial operations on April 01, 2002.
First Paramount Modaraba initially ventured into providing funds for the establishment of CNG filling stations and later on started establishing its own stations. Its third CNG station commenced operations on August 16, 2003. It draws bulk of the profit of CNG project and is being contributed gas selling operations.
BRR International Modaraba offers lease financing to corporate entities as well as creditworthy individuals. The Modaraba is unique among leasing companies and Modarabas in offering building leases. The scheme provides both for the lease of a building on land owned by the client or alternatively a lease encompassing both the provision of land and a building thereon.